Wednesday, June 10, 2009

Error of Emission

Today, an Italian car company opened 3,000 dealerships in the U.S. You can buy Italian minivans and SUVs in every major city. Cook up some pasta and find one near you!

How did it come that a European company bought the third largest U.S. auto manufacturer?

You could argue that the Chrysler got in financial trouble because of its health care and pension liabilities. You could argue that Chrysler was a victim of the current credit meltdown and consumer deleveraging. At the end of the day, it was a magnificent eight-cylinder, 5.7L, four hundred horsepower error of emission.

Fifty-three years ago to the month, the U.S. government committed to an extensive development of road infrastructure, the Eisenhower Interstate Highway System. The Highway Trust Fund collects fuel taxes and pays for road construction, to the tune of about $40B per year now. That translates into roughly 10-15% of U.S. car sales per year, and it's not keeping up with demands for new projects, maintenance, and operations.

By creating a standard for transportation infrastructure, the government fueled the growth of the Detroit economic engine. As long as oil and credit were available, Detroit could build big cars to fit on big roads. As long as the car business grew, it could fund burgeoning health care and pension liabilities. Detroit had no incentive to invest in anything other than bigger cars and bigger engines, and it made magnificent SUVs with profit margins high enough to pay for everything.

My point is really this. The United States makes important national policy on energy and transportation that impacts how investors and companies sell and market products. The decisions made fifty years ago need re-examination. They have taken the U.S. down a road where U.S. auto manufacturers have profited while losing market share. When a few assumptions in our policy changed, when oil prices skyrocketed and credit markets seized, it left the U.S. companies vulnerable to buy-outs.

Should we find a different road? New technology enters the market when there is an opportunity to displace existing technology. Market entry relies on predictable infrastructure investments. Right now, we keep our fuel prices lower than other countries and we can't keep up with transportation infrastructure spending. It might be a good time to raise taxes and invest in better infrastructure.

I enjoyed a nice Sangiovese with Fettucini Alfredo last night and toasted the Italians for coming to our rescue.